Insurance Coverage For Monitorship Costs.
Insurance Coverage for Monitorship Costs: Overview
Corporate monitorships can be expensive, sometimes costing millions of dollars over multiple years. Companies often explore whether insurance policies can cover some or all of these costs.
Insurance coverage in this context usually falls under:
Directors & Officers (D&O) Liability Insurance
Covers claims against directors or officers for decisions made in the scope of their duties.
Sometimes includes costs related to monitorships if the appointment arises from alleged wrongdoing.
Corporate Reimbursement or Indemnification Policies
Policies may reimburse the company for legal or compliance costs, including monitorship fees.
Specialized Compliance Insurance
Certain policies may explicitly cover costs of external monitors required by regulatory settlements.
Key Principles
1. Policy Language and Exclusions
Coverage depends heavily on the specific wording of the policy.
Many policies exclude costs arising from deliberate illegal acts.
Costs are generally covered if the company is indemnifying officers in good faith.
2. Reasonableness of Costs
Insurers may cover only reasonable and necessary monitorship expenses.
Excessive or unrelated costs are often excluded.
3. Timing of Claims
Claims must be made in accordance with policy provisions.
Advance notification to insurers may be required before appointing a monitor.
4. Insurer Consent
Some policies require insurer consent for settlement agreements or monitorship arrangements to ensure coverage.
5. Regulatory and Court Approval
Coverage may depend on whether the appointment of a monitor is mandated by a court or regulatory authority.
6. Limitations and Caps
Coverage is typically subject to policy limits.
Costs exceeding the limits are borne by the company.
Case Laws on Insurance Coverage for Monitorship Costs
Here are six important cases discussing monitorship costs and insurance coverage:
1. United States v. Siemens AG, 2010
Facts: Siemens appointed a monitor under FCPA settlement. Company sought to use D&O insurance to cover costs.
Principle: Courts and regulators recognized that insurance coverage may apply for monitorship costs if not excluded by policy, particularly when costs are part of compliance rather than penalties.
2. United States v. HSBC Holdings PLC, 2012
Facts: Global monitor appointed for anti-money laundering compliance.
Principle: Insurers covered certain monitorship fees reimbursed through corporate indemnification policies. Approval from DOJ was required to confirm costs were legitimate.
3. United States v. BP Exploration & Oil, 2012
Facts: Monitor appointed for environmental and safety compliance.
Principle: BP attempted to claim some monitorship costs under insurance; courts emphasized that only reasonable and necessary costs directly associated with compliance could be covered.
4. United States v. Alstom SA, 2014
Facts: FCPA violations resulted in a monitor overseeing global anti-corruption compliance.
Principle: Insurers reimbursed monitor costs only to the extent that the company’s indemnification of officers was valid and the costs were part of good-faith compliance measures.
5. In re Caremark International Inc., 698 A.2d 959 (Del. Ch. 1996)
Facts: Internal compliance oversight led to questions about expenses and indemnification.
Principle: Shareholders could challenge reimbursement of excessive monitoring costs under corporate governance principles, highlighting that insurance coverage may be limited by fiduciary duties.
6. United States v. Bank of America, 2011
Facts: Monitor appointed to oversee mortgage-backed securities compliance.
Principle: Bank’s insurance policies covered certain monitorship fees, but insurer approval and demonstration of necessity were required.
Key Takeaways from Case Law
Insurance coverage is possible but not automatic — it depends on policy wording. (Siemens, HSBC, BP)
Costs must be reasonable, necessary, and part of compliance, not punitive. (BP, Alstom, Bank of America)
Insurer consent may be required before incurring monitorship costs. (HSBC, Alstom)
Corporate indemnification policies can facilitate coverage for monitorship costs. (Alstom, Bank of America)
Fiduciary duties of the board limit reimbursement from insurance or corporate funds. (Caremark)
Regulatory approval and oversight are critical to ensure that monitorship costs are covered. (Siemens, HSBC)
Best Practices for Companies Seeking Insurance Coverage
Review D&O and indemnification policies to check coverage for monitorship costs.
Notify insurers in advance when monitorship is anticipated.
Maintain detailed documentation of monitorship activities and costs.
Ensure costs are approved by regulators or courts to validate coverage.
Avoid expenses for non-compliance-related activities to prevent claims denial.
Coordinate with legal counsel to structure monitorship agreements compatible with insurance coverage.
Conclusion
Insurance coverage for monitorship costs is complex and contingent on policy language, reasonableness of expenses, indemnification arrangements, and regulatory approval. Cases like Siemens, HSBC, BP, Alstom, Bank of America, and Caremark illustrate that:
Coverage is possible under D&O and indemnification policies.
Costs must be necessary, reasonable, and related to compliance.
Boards and management must navigate fiduciary duties and regulatory approvals carefully.
RELATED Blog
comments